The Social Security System

In the throes of the Great Depression in the 1930s, the United States Congress passed the Social Security Act to start building a pension system for senior citizens who, at the time, did not have financial protection. The idea was to tax 27 million employees and their employers a percentage of wages to be set aside as a fund to pay retired workers at least a rudimentary pension.

Every employer and employee was assigned an identification (ID) number that would be used for collecting and tracking the funds on a regular basis. Congress required that this program be implemented in 1937, and created a new agency to run it: the Social Security Administration (SSA). The agency was primarily staffed with statisticians and other experts, most of whom had never before worked in government. It was the largest accounting initiative in the nation’s history.

Social Security Tabulators

This historical silent footage of a punched card tabulating machine in operation shows part of the process required to create and maintain employment records for 26 million Americans.

IBM provided the punched card equipment and the expertise about accounting and payroll data that made it possible to implement the law. The project had an immense impact on IBM. In the mid-1930s, the company was struggling to survive the Depression. By the late 1930s, IBM was one of the hottest companies of that difficult era; the Social Security project catapulted IBM from a midsize corporation to the global leader in information technology.

The newly established SSA did not know how to implement such a large project so quickly, and asked for advice from some European governments that were already working on similar systems. “It can’t be done. The government should just abandon the whole idea,” said one expert from Europe. SSA employees talked to IBM, other office appliance vendors and still others in government who had been using IBM tabulating equipment for years. Eventually the SSA’s staff worked out a way for such a large volume of transactions to be done using data processing equipment. Everyone had concluded that a manual, paper-based approach would not work because there was too much data involved.

For IBM, demand for data processing had been dropping each year during the Depression. Competitors reacted by laying off employees, halting product innovations and reducing inventories. IBM did the opposite: it refused to lay off employees, and instead invested in research and stockpiled inventories when demand was low. IBM CEO Thomas Watson Sr. believed that the Depression would soon end and wanted to be ready to seize the moment to provide new state-of-the-art accounting machines.

IBM had to bid for the SSA business—in fact, the salesman on the account, H. J. MacDonald, worked full time on this deal for two years. Thomas Watson Sr. considered it a “must win” opportunity. Finally, all proposals came in, and on September 16, 1936, the SSA told IBM it had won the deal.

IBM had been chosen for two basic reasons. First, it had worked with the SSA to tailor its tabulating equipment to meet the government’s needs. Second, IBM could deliver and install the sheer volume of equipment fast enough to get the SSA up and running by the deadline mandated by Congress.

Watson also knew that 3.5 million employers in the US would need to feed payroll data to the SSA, and the biggest companies would need high-speed accounting machines to do it. Within months, thousands of IBM clients started asking IBM salesmen to work with them to build the payroll applications needed to conform to the Social Security Act. While the Great Depression continued until the start of World War II, for IBM the business drought was essentially over.

By the end of 1939, IBM’s revenues had increased by 81 percent over 1935 levels. IBM’s US workforce grew from 6268 in 1935, to more than 10,000 in 1941. Just as important, IBM’s reputation as an innovative firm had spread across the government and private sector; its strategy of investing for the future during the Great Depression had proven successful. Watson’s son later recalled that his father had been severely criticized for this optimistic strategy by his board, his competitors and the business press. Watson’s personal optimism about the demand for data processing was vindicated by winning the SSA contract. Of course, he was also lucky. If the Social Security Act had not passed and demand for IBM machines had not materialized, the company could have collapsed.

As government expanded in size over the next half century, IBM grew right along with it, first with tabulating equipment, later computers. Public officials frequently turned to IBM to solve other big, complex, “mission impossible” problems, from how to build an air defense system to protect North America during the Cold War, to guiding manned flights to the moon, and more recently, to supporting Medicare, addressing environmental issues and collaborating in medical research.